Timor-Leste

Key development challenges

Timor-Leste is a lower middle-income country and the smallest economy in Southeast Asia. In 2022, Timor-Leste’s GDP was $3.2 billion, representing 0.09% of Southeast Asia’s regional GDP. With a population of 1.34 million, Timor-Leste’s per capita GDP of $2,400 is the fourth-lowest in Southeast Asia.

Timor-Leste faced decades of civil war before achieving independence in 2002. From 2007 to 2016, the country experienced high economic growth, driven by a dramatic scaling up of government expenditures financed by drawdowns from the Petroleum Fund, the country’s sovereign wealth fund. This was, however, punctuated by back-to-back recessions in 2017–18 and again in 2020. Nonetheless, non-oil GDP, the Timorese government’s preferred measure, grew by 3.3% in 2022, supported by public spending and rebounding private consumption. The country faces a critical economic transition as revenues from active oil and gas fields dry up.

The Timorese government’s development agenda is focused on promoting infrastructure construction while meeting people’s needs for better education, healthcare, and quality of life. Development finance continues to play a significant role in Timor-Leste’s progress. In 2022, official development finance (ODF) was equivalent to 7.7% of Timor-Leste’s GDP, the second-highest ratio in Southeast Asia, after Cambodia (7.8%). Over the 2015–22 period, more than 5,400 projects were implemented by 54 development partners in Timor-Leste, collectively representing around $2.3 billion in ODF.

Overview of development finance trends

From 2015 to 2022, ODF disbursements to Timor-Leste — including grants, loans, and other forms of assistance — averaged $286 million annually (in constant 2022 US$). ODF flows to Timor-Leste remained largely consistent during the period.

Australia remained Timor-Leste’s major provider of ODF throughout this period, disbursing close to one-third of the country’s incoming ODF. Between 2015 and 2019, Australia’s ODF disbursements to Timor-Leste declined to a low of $61 million before doubling, in response to the Covid-19 pandemic. Australia’s ODF spending to Timor-Leste in 2022 declined by 35% to $72 million.

ODF flows to Timor-Leste were just 0.1% of the total regional ODF between 2015 and 2022, the smallest share in the region (excluding Brunei and Singapore). However, in per capita terms, Timor-Leste is the region’s second-highest ODF recipient. Over the eight-year period, Timor-Leste received on average $188 in ODF per person per year; less than Laos ($216) but significantly more than the regional average of $88.

Between 2015 and 2022, the role and significance of ODF in Timor-Leste’s general output declined by more than half, falling from 14.4% of GDP in 2015 to 7.7% in 2022. Most of the decline occurred between 2018 and 2022 and was caused by substantial GDP growth in 2021, not a decline in ODF support.

Timor-Leste is an outlier in Southeast Asia in that it has not received ODF for major energy or railway projects. This means Timor-Leste’s commitment-spending gap is narrower than that of regional peers. Nonetheless, the expansion of the Presidente Nicolau Lobato International Airport, to which the Asian Development Bank (ADB) committed in 2021, generated a large increase in the gap between project commitments and disbursements in 2021.

Main development partners

Australia’s contribution to Timor-Leste almost doubled between 2019 and 2021, jumping from $61 million to $111 million, then decreasing in 2022 to $72 million. Timor-Leste’s second tier of major partners — Japan, the United States, and the ADB — averaged annual ODF disbursements of around $30 million in 2015–22.

Australia’s ODF disbursements in Timor-Leste focused on the government and civil society sector, which accounted for one-third of its ODF flows. The largest Australian project in this sector was the $37 million Governance for Development Program. Another significant project was the Ending Violence Against Women in Timor-Leste program, which has seen $25 million disbursed since 2016. Australia’s largest non-government and civil society sector project was the National Program for Village Development, worth $30 million.

The ADB, Timor-Leste’s major provider of development loans, focused on transport projects. The Road Network Development Sector Project and the Baucau Highway Project were worth $27 million from 2017 to 2022.

ODF to Timor-Leste was largely made up of grants, reflecting the country’s significant development challenges and limited access to credit markets. Timor-Leste’s main sources of ODF loans were the ADB, the World Bank, China, and Japan, all primarily financing road-building.

Sectors

The sectoral distribution of ODF spending in Timor-Leste was quite distinct from Southeast Asian regional averages, reflecting Timor-Leste’s particular development challenges, from the legacy of past conflict and its impact on public infrastructure to the limited capacity of the Timorese government to deliver social services.

Timor-Leste faces extreme human capital challenges. Close to half the country’s children under the age of five suffer from stunting. While health, education, and clean water access are cited as the government’s top priorities, budget allocations for these critical development sectors fall below international benchmarks for developing countries. The sectoral distribution of ODF to Timor-Leste partly reflects attempts to close this gap, with ODF flows for health and education more than double the regional average.

Climate

Due to Timor-Leste’s fossil fuel endowment and limited grid infrastructure, there has been little demand for large-scale renewable energy projects in the country. The vast majority of its climate development finance has been in the form of climate-resilient infrastructure projects, such as the Timor-Leste Road Climate Resilience Project funded by the World Bank and the Australian Roads for Development – R4D project. Outside of infrastructure, projects in Timor-Leste with a “principal” climate objective have focused on sustainable agriculture and fishing practices.

Gender

In 2022, Timor-Leste received gender-related ODF worth $118 million, of which $108 million was spent on projects that had gender equality as a “significant” objective. From 2015 to 2022, the total of gender-related ODF to Timor-Leste was about $1 billion, with an average of $130 million a year. Australia, the ADB, and the European Union are the major providers of gender equality ODF, usually through grants or concessional loans in the transport and storage or government and civil society sectors.

Timor-Leste as an ODF provider

Despite being the smallest Southeast Asian economy by a significant margin, Timor-Leste has provided some ODF for humanitarian aid to other countries in the region. For instance, in 2015 the Timorese government provided a $1 million support package to Malaysia following Cyclone Ian. It also provided two $750,000 grant packages to Indonesia and Laos following natural disasters in 2018 and 2019.

Overall, the contribution of Timor-Leste to the region was just under $5 million during the 2015–22 period, which was just below 1% of total intra-regional ODF.